I purchased Lenenergo Prefs final week at a mean of 168. It is a 3% weight, I’m additionally re-entering EOS Russia – a fund holding Russian grid firms, additionally at a 3% weight.
This got here to me from EOS Russia – a Swedish listed funding in Russian electrical energy distribution grids (kindly advisable by one among my beloved readers). These are largely owned by Rosetti – the Fundamental Russian electrical energy operator however have minority shareholders and (considerably illiquid) listed stakes. They’re very low-cost and appear to have turned a nook when it comes to profitability / dividends. EOS are buying and selling at a c20% low cost to NAV, have moderately low bills and have holding in what look like very undervalued belongings turning the nook.
EOS put it properly right here:
If the businesses proceed operationally on the present trajectory and dividend payouts stay at round 40% of IFRS web earnings, the dividends which will moderately be anticipated on 2021 earnings would suggest the next dividend yields at present share costs: MRSK Middle-Volga 13-15%, MRSK Urals 17-22%, MRSK North-West 4-10% and Lenenergo pref 12.8% (this based mostly on Lenenergo’s most well-liked dividend method). MRSK Volga’s dividends will probably be nonetheless zero or very modest as the corporate reported a loss within the first half, though it nonetheless has a good probability to interrupt even for the total yr. MRSK Volga’s outcomes ought to enhance a minimum of considerably on the again of rising industrial exercise within the area.
I really suppose Lenenego pref’s dividends will probably be greater than 12.8%. My greatest guess based mostly on the half yr might be a desire dividend of 19-25 Rub per share. so a yield of c11-15%. I really suppose nearer to fifteen%, however we’ll see. Rosetti prefs commerce at a c3-10% yield (it varies loads) so if this low cost narrows it implies an honest rise in value, although RSTI is way bigger, and extra liquid. Russian base charges are at 6.75% (having simply risen). Distribution ought to be a long-term secure enterprise, significantly sooner or later.
Russian desire shares are considerably uncommon they often supply a proportion of web revenue – distributed amongst all desire share holders. Rights can solely be altered with the consent of desire holders. Normally if the corporate goes to do away with Prefs a suggestion is made to purchase them out following an impartial appraisal. Clearly that is Russia, so do you actually belief every little thing will probably be carried out in an above board manner? Apart from day-to- day inefficiency and corruption I’m not conscious of a lot minority oppression within the electrical energy trade. Virtually all Lenenergo is owned by Rosetti or the Saint Petersburg metropolis authorities, the minorities are solely 2.5% of the shares in issue- so (hopefully) barely value stealing from. The prefs are an inexpensive proportion of this (22%), sadly, I don’t have a breakdown of who owns the prefs.
There are many inefficiencies and oddities within the Russian electrical energy market – totally different tariffs to do the identical factor for various firms, decrease prices in numerous areas, a few of that is coverage to assist sure causes, some is simply the best way the system advanced and doesn’t make a lot sense. They’re cleansing all of it up and transferring (for distribution) to a regulated asset base / charge of return regulation from price plus. This could give Lenenergo and the opposite grids scope to chop prices (which had been based mostly on price+ regulation). I imagine this has been began in Leningrad / St Petersburg already, although exhausting data on this has proved unimaginable to seek out, one of many downsides in investing abroad.
There’s no need to fret about excessive power costs. Russia makes use of decrease inner fuel costs so I might not anticipate there to be authorities motion associated to this, not like in Europe the place it is a actual chance.
There’s some dialogue of a Rosseti buyout of Lenergo. I believe the ord’s are the place you need to be if you wish to play this as they may take a look at P/B low cost and St Petersburg govt has a far greater price value. I desire the prefs attributable to a pleasant excessive (hopefully extra secure) yield/
Don’t neglect as properly that the Rouble is undervalued on a PPP stage and phrases of commerce look like bettering with a better oil/fuel/pure useful resource value.
So that you get a 10-15% yield, scope for share value rises sooner or later and (probably) appreciation in change for acceptance of a small stage of corp governance threat / opacity. Relying on H2 outcomes I might hope for fast appreciation in Lenenergo over the subsequent yr. EOS Russia will take a number of years to play out however has a a number of of the upside.
As ever ideas / feedback appreciated.